Some recent volatility in currency markets began with the Reserve Bank of New Zealand intervening to stem the rise of the Kiwi. At the same time, the Reserve Bank of Australia cut its overnight lending rate. Both actions caused sharp declines in their currencies. These currencies had been a particular favorite of Japanese investors (aka, Mrs. Watanabe) seeking more yield than what’s available in Japan.
All this roiled currency markets Friday in Asia as the yen plummeted further crossing the psychological level of 100 vs the dollar. Bucky rallied against most other currencies feeding on itself Friday in the U.S. This then slammed gold, other commodities and in turn hurt commodity dependent emerging markets. Equity markets in Japan rallied mightily as the yen/dollar cross collapsed. Also JGBs (Japanese 10 year bond prices fell by the limit.) A natural economic competitor to Japan, South Korea, saw its equity market slide as its currency (won) declined to match the yen’s fall. (South Korea still remains a major weighting in the MSCI Emerging Market Index which saw the index slide over 1%) Like falling dominoes, Brazil’s real currency also fell on inflation fears. And so it went.
As Greenlight Capital’s David Einhorn observed in his client letter: “…unconventional monetary policies is now a global phenomena. Other central bankers notice and, acting in the philosophy of ‘Anything you can do, I can do better,’ take turns in one-upmanship. This serially correlated behavior smacks of a bubble mentality. But investors are currently complacent about the unintended consequences of central bank money printing, and like most investment cycles and fads, this will persist until it doesn’t.”
This chaotic market behavior will no doubt be addressed at this weekend’s G-7 meeting in London. Other than calming rhetoric, there is little else they may do since currency wars and QE game is now a “global phenomena”.
The Bernanke Chicago speech became little more than a side show Friday. He did say the Fed was keeping a watchful eye on yield risk-taking given ZIRP. He’s a little late to that observation methinks.
Bond Daddy Bill Gross (PIMCO) tweeted the long bond bull market is over. The statement is honest yet odd since he owns more bonds anyone.
U.S. stock markets didn’t fluctuate too much Friday but beneath the surface conditions appeared more tenuous. Thursday we noted how recent ultra-light trading combined with active algo/HFT trading made the market vulnerable to rumors. Current algos are programmed to pick-up any hints of trouble and run with it before the next guy. That makes markets more accident prone.
Tech (QQQ), homebuilders (ITB), consumer discretionary (XLY) and biotech (IBB) led markets higher. Losers included gold miners (GDX), energy (XLE) and bonds (TLT). The dollar (UUP) rallied sharply while gold (GLD) was the big loser. Commodities (DBC) fell sharply along with energy (USO).
For us carbon-based but systematic investors it’s a battle of trend-following duty vs emotions when dealing with current markets. The higher we go the more systems are challenged to stay with the trend. Taking some profits and raising stops is all one can do.
Volume remains ultra-light despite all the market-moving action from overseas and currency chaos. Breadth per the WSJ was positive.
SPY 5 MINUTE
The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.
The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended.
The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge". Our own interpretation is highlighted in the chart above. The VIX measures the level of put option activity over a 30-day period. Greater buying of put options (protection) causes the index to rise.
This was a light week for economic data but a heavy week for currency chaos. Bulls gutted it out to close the week with a lift. But we’ve seen other markets roiled particularly emerging markets, Australia and Asia in general.
Next week we’ll get more in the way of economic data (Retail Sales, Industrial Production, Housing data, Empire State Mfg, Philly Fed, Jobless Claims and Consumer Sentiment). Europe will also provide some GDP data. The tail end of earnings and more QE is on the way no doubt.
Markets are overbought from an intermediate term view but corrections have been difficult to come by with all this liquidity.
Let’s see what happens.